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Regulation

'Blame United,' 'Blame Deregulation,' and Other Fallacies

Government didn't create the problem of unpleasant air travel. Customers want it.

Did you see that passenger getting hauled off the United flight?

No, I spent the last week hiding under a rock for tax reasons.

Do you really need to be sarcastic?

Need, no. Enjoy, yes. Next question.

What do you think about it?

United messed up, obviously.

Will United Airlines’ Customer Problems Impact Investors?

I know! How dare they kick off paying passengers to make way for their employees? It’s like they think the airline operates for their convenience instead of the customers, isn’t it?

No, not exactly. Actually, they kicked people off the plane so that they wouldn’t have to cancel an entire flight the next day. The employees they boarded were the crew for that plane.

I think you’re just making excuses. I read that airlines sell more seats than they have on flights, just to make more money out of them. That pretty clearly shows they don’t care about their passengers, doesn’t it?

As far as I can tell, United Flight 3411 wasn’t oversold; it was just full, meaning that when the airline needed to board a crew, they had to remove passengers. But to answer your question anyway, I assume that like most companies, United Continental Holdings Inc. cares about its passengers, at least to the extent of keeping them from switching to another airline. They don’t oversell flights because they don’t care; they oversell flights because we want them to.

Excuse me? I most certainly don’t.

I don’t know about you, personally, since I just made you up for the purposes of this column, and I haven’t had time to really dig into your secret dreams and hidden inner motivations. But collectively, we get the airlines we want, which is to say, the airlines we are willing to pay for.

That is our “revealed preference” -- what economists call “the things people actually do, rather than what they say.” Customers prefer ultra-cheap air travel. The best way to make the tickets cheaper is to put more people in an airplane.

But that's because there’s no point in shopping. The major airlines are all terrible.

Okay, but major airlines and startups have experimented with better service -- more legroom and wider seats, more amenities. This meant carrying fewer passengers. It turned out people wouldn’t consistently pay those higher prices; despite heavily advertising their better amenities, the airlines in question generally ended up going out of business, or switching to the “cattle class” service we all know and hate.

The market has spoken pretty loudly; it’s just that we don’t like what it’s saying.

Oh, come on, isn’t this just that old right-wing cliché that markets always produce the best outcome? People acting in their own personal self-interest can often make everyone worse off, including themselves.

You're referring to a collective action problem. That’s a problem where the rational thing to do on an individual level will make us all collectively worse off. You can think of a fishery from which the rational thing for each individual fisher to do is catch as many fish as you can … until the whole fishery collapses, and no one catches any fish.

Collective action problems certainly exist, and that’s one reason we have government. But a collective action problem is not just “something that makes a minority unhappy”; no system makes every single person better off. A true collective action problem is one in which collectively restraining destructive individual instincts can make everyone -- or at least, a substantial majority of people -- better off.

In the airline market, I see no evidence that there is even a large minority of customers who are willing to bear substantially higher costs for the sake of substantially better service.

That’s why we should never have deregulated the airline market! If it were still regulated, people wouldn’t be able to engage in this destructive race to the bottom. Bet you didn’t think of that, did you, you corporate shill?

Oh, indeed I did. Prior to federal deregulation in 1978, the Civil Aeronautics Board prioritized things that are not really valued by the market -- like keeping fares cheap to secondary markets, and keeping every existing airline in business. As a result, they tended to award new routes in order to help shore up financially weak firms, and resisted discounting, though eventually they did allow a limited amount.

Since airlines couldn’t compete on price, they instead competed on convenience and service. The result was a large number of planes flying around with many empty seats. By the early 1970s, capacity use dipped under 50 percent.

Obviously, if you were flying, this was a very nice time to be doing it. With all those empty seats, you didn’t have so much trouble getting a last-minute booking, or getting another flight out if you missed your plane. The middle seat was often empty, so you didn’t have to spend your time on board in a protracted cold war over precious armrest inches. And if they generally had empty seats, airlines would obviously not need to bump paying passengers in order to make room for crew.

On the other hand, this was necessarily expensive. So while air travel was better for those who could fly, fewer people could afford to fly as often as folks do now.

Deregulation was, however, an unambiguous Bad Thing for two groups of people: those who wish to fly shorter or less popular routes, and mid-level business travelers.

It was bad for people who fly short distances because it costs less in fuel to keep a plane in the air than to get it there, so short-haul flights are relatively expensive to operate, a difference that had been masked by the federal regulations.

It was bad for mid-level business travelers because their companies had to fly them places, but insisted on doing so at the lowest available price. If the lowest-possible price was for a comfy wide seat in a half-empty plane, companies would pay it. But if cattle class is available, many companies buy that instead.

But I read this article saying deregulation hadn’t even obviously caused ticket prices to decline. Are you sure?

Yeah, I read the same article, last week in New York magazine. It says: “This shift did little to nothing to make airfare more affordable in the long term. The cost of flying was actually declining at a faster rate before deregulation than it has since, according to a 2007 study in the Journal of the Transportation Research Forum.” I have also read that 2007 study.

The paper actually makes multiple arguments. One is that analysts are overestimating the benefits of deregulation for technical reasons we will leave aside the interests of keeping readers engaged. Another is that deregulation dispersed fares, with premium passengers (last-minute travelers and those on certain routes) paying more, and discount economy passengers paying less, so that the average hasn’t really declined any faster than it was doing before.

I think there are some problems with this argument; for one thing, prices tend to decline relatively quickly in young markets, and then level off, so the fact that they continued to fall is actually a point in deregulation’s favor. But I don’t think it’s contested that fare dispersion has been a major effect of deregulation.

However, if fares are more dispersed, that tells us that we now have a broader range available: higher fares, yes, but also lower fares. And those lower fares mean that air travel is now within the financial reach of some folks who were previously frozen out.

To the extent that deregulation has contributed to today’s crowded flights, it is necessarily what has also allowed fares to decline. Most of the cost of a flight is the fixed cost of buying, staffing, and getting a plane into the air; the marginal cost of each additional passenger is relatively trivial. Crowding lets us share the cost of getting the plane in the air over more travelers, making it cheaper for each individual. And in general, this is a good thing: It is both economic and environmental madness to strive toward less utilization of limited airline space.

Of course I don’t want planes to fly around empty! But why can’t we have a better regulatory regime that helps us utilize space efficiently without treating passengers like cattle?

Most of the unpleasantness of modern air travel is due to the fullness of planes. Airline food was never good and never going to be, and standing around at the baggage carousel certainly wasn’t much fun. What people really hate is trying to find a seat in a crowded waiting area, running out of room in the overhead bin, cramming into a tiny seat with no legroom, standing in line for the bathroom, getting bumped from an oversold flight. In other words, what they hate is the fact that there are so many darn people on the plane. (Flights' capacity use hovers in the mid-80s these days.)

Don’t get me wrong: it’s absolutely possible that we could have had a better regulatory regime than the one that prevailed from the 1930s to the late 1970s. (Electricity regulation, for example, has gotten much more efficient since that time, without anyone saying “Whee! Free-form jazz odyssey in the power market!”) If you imagine a counterfactual in which airline regulation evolved to be more market-friendly and efficient, then you should discount the benefits of the 1978 deregulation accordingly.

But notice what that wouldn’t fix: The problems we hate about air travel. Because more efficient regulation would have been regulation that delivered the same capacity use we see now, or maybe even higher. Airlines don’t cram in seats and oversell flights because they are sadists. They do it because that’s how they maximize the number of passengers in that limited space.

Even the much-maligned overbooking helps us use planes as efficiently as possible, because people do miss flights. If airlines didn’t overbook, their capacity use would be lower, we’d waste fuel flying more empty seats around, and we’d all have to pay a little more for tickets.

Or maybe airlines could just, I dunno, take a little less profit?

The industry is fiercely competitive. United’s profit margin in the most recent year was 6.2 percent, which is not exactly the level you’d expect from unfettered price gouging. And at that, it has to offset the bad years, like 2001 or 2009, when airlines bleed green in life-threatening amounts.

Are you really going to stand up and defend United? That guy was bleeding.

Oh, heck, I'm not defending United. (Though I will note that it was the cops, not United, who made him bleed. It’s a little odd that our ire has been focused on the company.) United made two really dumb mistakes. First, it let passengers board before the bumping began. That was stupid. It’s easy to keep someone off a plane, and hard to remove them once they’re there.

Then the airline compounded its error by trying to remove people by force. Now, United may have the legal right to do so. But that’s irrelevant. It would have been cheaper for staff members to just keep offering more cash until four people agreed to get off. At some price, they’d have found takers. They should have found that price instead of slowing down the boarding process and turning themselves into a viral disaster.

The market created this problem. The market could have solved it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Megan McArdle at mmcardle3@bloomberg.net

    To contact the editor responsible for this story:
    Philip Gray at philipgray@bloomberg.net

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